'Family Business Education Key To Governance': Farhad Forbes

There is a theory that family businesses do not survive beyond three generations—is this true?

The perception that family firms do not last is incorrect. Family firms do last. The question is why they last a limited number of generations. The fundamental issue is business challenges. Over 60–90 years, the business environment changes, technology affects things. If you do not keep up, businesses fail or get taken over. This happens with non-family firms too.

What is unique for family firms is the need to address family governance issues. If not addressed, problems arise, especially at the point of succession, leading to conflicts that divert attention from the business, causing them to fail. Corporate governance is as necessary for family firms as for non-family firms, but family firms also need to focus on family governance.

Indian families do not spend enough time on family governance, leading to these issues. However, many family firms [across the world] do invest in family governance and survive for many generations. We have examples of Japanese firms in our network that are 12, 18 and even 30 generations old.

How can family businesses get governance right?

Thirty or 40 years ago, there was limited information on family governance. Successes were often natural. Today, we have extensive research and examples of good practices. We have facilitators who focus on educating families, building relationships and exposing the next generation to the family business. It is crucial to preserve the values that led to the business’s success and align them with the next generation. Problems arise when different siblings have different values and expectations.

A family firm needs to address how the next generation will enter the business, whether they will work in it and how they will share rewards. A clear dividend policy is essential. Having these conversations and capturing agreements in a document provides a guideline for the future. Family business education is key to effective governance.

Are family constitutions a good way for family governance?

If you are a large family with many members inside and outside the business, it is good to have something like a constitution in place. The mistake many families make is that they go to a consultant or lawyer, get a template or draft of a constitution, discuss it cursorily within the family and adopt it without careful consideration. This does not generally work because such templates may not be right for that family.

The key is to talk through what a specific family wants in their constitution or family guidelines. The process of coming up with these guidelines is far more important than the document itself. Discussing succession issues, who should be in business, whether in-laws should be invited are all crucial questions. The process ensures you have a way to discuss and amend these issues harmoniously.

For instance, if your guidelines say no in-laws in business today, but in five years someone marries a highly qualified person with the right values, you need a process to amend this harmoniously. The process of arriving at the final document is what is crucial. It does not need to be an elaborate legal agreement.

Have conversations around institutionalising succession picked up pace in the past five years?

People are clearly finding these solutions and sharing them. The south [of India] has always been more progressive with family businesses investing in these practices through CII [Confederation of Indian Industry] programmes and other means. However, we are now seeing changes in other parts of the country as well. While progress is happening, it is slow. We would like to see many more families adopting these practices.

Are women increasingly playing more significant roles in family businesses?

We are seeing significant change. Traditionally, many families believed male heirs would join the business while female heirs would marry and join their husband’s family business. This has now changed dramatically. Five years ago, at a session in Kolkata, a woman asked: “How do women of the next generation break into the old boys club?”

Last week, we had panels by women and several female family members discussing leadership roles in their family businesses. Excluding women from the business curtails the talent pool by 50%. In some families, there are no male heirs. What are you going to do in such cases? We have seen many cases of women leading their family businesses successfully.